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so in this paper investor flows and
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fragility in corporate Bor funds uh
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which I wrote with David Ang and ha
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young uh we study flows and performance
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of mutual funds that invest in corporate
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bonds let me give you just a brief
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summary uh assets of mutual funds that
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invest in corporate bonds have grown
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substantially in recent years following
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the crisis many investors felt that they
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did not have many attractive uh
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investment vehicles and a lot of money
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has basically flown into uh mutual funds
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that invest in corporate bonds now this
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poses I think a very interesting
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challenge for researchers for many years
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there has been a lot of research
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studying uh mutual funds that invest in
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equity uh but there hasn't been that
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much research uh looking into bonds uh
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into mutual funds that invest in uh in
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bonds and in particular in corporate
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bonds now there's a growing concern of
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fragility uh the possibility that a lot
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of this money is going to be withdrawn
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at the same time from many mutual funds
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as a result causing effects on uh
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corporate bonds of the prices of
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corporate bonds and uh potentially
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destabilizing uh the market for
00:01:20
corporate bonds and having also some
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real effects for the economy as a whole
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as a result there is an uh I think
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growing importance to understand the
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patterns of flows and performance of
00:01:31
mutual funds that invest in corporate
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bonds and this is what we do in this uh
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study previous research on Equity mutual
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funds basically showed that uh outflows
00:01:45
are not very sensitive to bad
00:01:47
performance what we show in the context
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of corporate bond mutual funds is that
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outflows are much more sensitive to bad
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performance in fact outflows are more
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sensitive to bad performance than
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inflows are to good performance which is
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the complete opposite of what people
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tend to find in the context of equity
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mutual funds in the context of fragility
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this raises the concern that in case of
00:02:11
uh bad performance or overall bad times
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uh there will be massive outflows out of
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the corporate bond mutual funds now
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clearly given that this is an industry
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that holds about 1.7 uh trillion dollars
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in in in assets uh this is uh a reason
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for concern or a reason uh to sort of
00:02:31
watch out and see uh what's going to
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happen in case of uh bad
00:02:41
developments I think going into this
00:02:43
research we didn't really know what to
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expect as I mentioned there was a lot of
00:02:47
research on Equity mutual funds
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basically showing that inflows are much
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more sensitive to good performance than
00:02:53
outflows are to bad performance we did
00:02:55
not know what to expect going into the
00:02:58
research on corporate bond mutual funds
00:02:59
and we found the opposite that outflows
00:03:01
are much more sensitive to bad
00:03:03
performance than inflows are to good
00:03:05
performance I'm not sure if I would call
00:03:07
it a surprise but it it was uh a very
00:03:10
interesting finding I
00:03:15
think we think that the sensitivity of
00:03:18
outflow to bad performance in corporate
00:03:20
bond mutual funds is coming due to the
00:03:22
fact that they hold illiquid assets but
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at the same time they allow people and
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institutions to take money out on a
00:03:29
daily BAS cases based on the last
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updated price uh what we show in the
00:03:34
research is that this sensitivity
00:03:37
depends greatly indeed on the
00:03:39
illiquidity of the asset so for example
00:03:42
funds that hold more cash are less
00:03:45
subject to this great sensitivity of
00:03:47
outflows to bad performance and this is
00:03:49
because if you have uh more cash uh then
00:03:52
investors know that they depend Less on
00:03:55
uh the withdrawals by others and as a
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result they're less Keen to take their
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money out once there are bad
00:04:01
developments um in the same vein we
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basically show that the sensitivity goes
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up uh when IL liquidity is greater at
00:04:09
the macro level and this can be measured
00:04:11
by the vix for example which is a
00:04:13
measure of overall volatility and other
00:04:16
measures of aggregate
00:04:17
illiquidity uh so basically what we show
00:04:20
is that funds uh that invest in more
00:04:22
illiquid assets or during more illiquid
00:04:25
times are going to be more subject to
00:04:28
Greater sensitivity of out flows to bad
00:04:30
performance uh this is something that we
00:04:32
can think of as more fragility so you
00:04:35
can basically address this fragility by
00:04:37
holding more liquidity or changing the
00:04:40
way that investors take money out uh
00:04:43
whatever the Redemption formula is
00:04:45
whatever they get out of the fund in
00:04:47
case they take their money
00:04:52
out so I think that there is an overall
00:04:56
perception uh that mutual funds are not
00:04:59
subject to any kind of
00:05:01
fragility uh basically people view
00:05:04
mutual funds as being very different
00:05:06
from Banks investors put the money in
00:05:08
the fund and get whatever is the value
00:05:10
of the assets when they take their money
00:05:12
out I think our paper shed some more
00:05:15
light on it basically showing that there
00:05:17
is some potential for fragility there is
00:05:21
some of this first mover advantage that
00:05:23
we tend to see in the context of Banks
00:05:26
and this is because when people take
00:05:27
their money out of the fund they impose
00:05:30
some negative externalities on those who
00:05:32
stay in the fund this is Amplified by
00:05:36
illiquidity and as a result you tend to
00:05:38
see this first mover Advantage uh
00:05:41
amplifying uh the uh incentive of people
00:05:44
to take their money out in case of bad
00:05:50
performance so this is basically the
00:05:52
first paper that looks at the
00:05:54
sensitivity of outflow to Performance in
00:05:56
corporate bond funds as I said corporate
00:05:59
bond funds have become a very uh
00:06:02
important uh investment vehicle in the
00:06:04
economy in recent years it's important
00:06:06
to understand what causes withdrawals
00:06:09
out of these mutual funds and as far as
00:06:11
I know we are the first paper to to look
00:06:13
at that and analyze it um we basically
00:06:16
document that there is some sense of
00:06:19
fragility in the sense that uh people
00:06:23
when they think that others are going to
00:06:25
take their money out of mutual funds
00:06:27
that invest in corporate uh bonds they
00:06:29
have greater incentive to do that uh as
00:06:35
well in in this particular paper we
00:06:38
basically look at fragility at the level
00:06:40
of the fund uh we show that there is a
00:06:42
first mover Advantage at the level of
00:06:45
the fund in the sense that if investors
00:06:47
think that other investors are going to
00:06:48
take their money out of the mutual fund
00:06:51
they have a greater incentive to do so
00:06:53
as well uh this is kind of similar to
00:06:56
the phenomenon that is well known as a
00:06:58
bank run uh people take money out of a
00:07:01
bank just because they expect other
00:07:02
people will do that we think something
00:07:05
kind of similar maybe weaker happens uh
00:07:08
in the context of uh mutual funds uh in
00:07:11
particular those that invest in
00:07:12
corporate bonds because uh corporate
00:07:14
bonds tend to be very liquid so this
00:07:17
force is going to be stronger I think
00:07:19
going uh further uh one wants to look
00:07:22
more at systemic implications the extent
00:07:25
to which uh this uh puts the economy as
00:07:28
a whole or the Market as a whole in a
00:07:31
tough position in a risky uh position
00:07:33
and this will be particularly important
00:07:35
for policy implications so far as I
00:07:38
mentioned we only look at it at the
00:07:39
level of the fund and we think there is
00:07:41
this Force the first mover Advantage at
00:07:43
the level of the fund itself uh but
00:07:46
policy intervention will only be
00:07:48
required in case uh this also uh poses
00:07:52
externalities on the rest of the economy
00:07:55
uh externalities that uh fund managers
00:07:57
themselves are not going to internalize
00:07:59
and are not going to address
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[Music]
